Will a low appraisal wreck your refi?

The 30-year fixed mortgage rate keeps getting lower and lower, making it a great time to refinance your mortgage and cut your monthly payment. But as Pat Esswein, associate editor of Kiplinger’s Personal Finance magazine, reports, homeowners have to clear a few hurdles before they can refinance.

One of those hurdles is the appraisal, which determines the value the bank will assign to your home.

That’s an important number because it determines your refinancing options and affects your monthly payment and interest rate. For example, if your home value drops and your loan-to-value is higher than your lender allows, typically 80 percent, you have to either increase your equity with cash or pay for mortgage insurance.

I recently spoke with Esswein about ways to get the highest possible value before the appraisal, and what to do if your appraisal comes in low.

What to do before an appraisal to get a higher home value

There are a few things you can do to get highest possible appraisal possible.

First, consider researching the appraisal company. “This may be a little bit of a stretch, but when looking for a lender, ask what appraisal management company they order appraisals from,” says Esswein.

What you want is an experienced appraiser who really knows your local market, and you’re most likely to find that kind of appraiser at “a smaller, local appraisal management company that probably pays more and therefore attracts the best appraisers,” says Esswein. “Some companies go for the cheapest hires who also are willing to travel really far, so that means they’re inexperienced and they don’t know your area very well.”

Second, get your home in shape. “Make your house show well,” says Esswein. “Clean, declutter and fix things that need to be fixed so that when the appraiser comes, they’ll note that your house is in the best condition it can be.”

While you’re at it, create a house file for the appraiser that documents any upgrades or recent repairs, such as the new roof you installed two years ago. “When the appraiser actually comes to your home, have the file ready for them and walk around with them to point out the upgrades,” says Esswein.

Third, research recent comparable home sales. “Even though you may feel that prices are rising in your market, and in many markets they have, the appraiser still has to find comparable recent sales to support the value,” says Esswein. “One recent comp doesn’t make a trend, and appraisers may be adjusting prices more slowly than you wish.”

Instead of hoping the appraiser will pull a complete list of comps, Esswein suggests contacting a real estate agent to ask for a list of recent comparable sales, which you can add to your house file. “An experienced real estate agent will know what’s most comparable to your house,” she says.

What to do if your appraisal is low

So what happens if your appraisal is lower than expected? Is it possible to get another appraisal from a different company?

Esswein says you could shell out $250-$350 for a second opinion, then appeal to your loan officer with the new appraisal. “But before you do that, you should ask your loan officer if they’ll even consider the second appraisal,” says Esswein.

It’s more likely that the first appraisal will stick, but you still have options for refinancing.

Let’s say your home is appraised for $180,000. You still owe $162,000 on the mortgage, which is 90 percent of the value of the home. What are your options?

When it comes to maximum allowable loan-to-value, 80 percent is usually the magic number, so there are three things you can do if you aren’t at 80 percent.

Option one: Bring more cash to closing. If you can afford to put in an additional $18,000 in cash, you’d reduce the loan balance to 80 percent of the value of your home.

“Keep in mind that even if you anted up that money, you still have to have enough money in your reserves to satisfy any lender requirements for adequate savings, which is usually two months’ worth of mortgage payments, but can be more,” says Esswein.

Option three: Pay for PMI. PMI protects the lender if you stop making payments. “Because home values have fallen, many homeowners who didn’t need PMI when they bought their home will need it when they refinance,” says Esswein.

If you opt to refinance and need PMI, there are two ways you can pay for it.

One way is to simply pay for PMI yourself, which typically costs 0.5 percent to 1.5 percent of your loan amount per year. “Your lender will add the cost of PMI into your monthly mortgage payment,” says Esswein. “You would continue to have to pay the extra premium each month until you have 20 percent equity, at which point you can contact the lender and ask them to cancel PMI. Otherwise, when loan-to-value reaches 78 percent, they have to drop PMI automatically.”

The other way you can pay for PMI is lender-paid mortgage insurance. With lender-paid mortgage insurance, the cost of PMI is folded into your interest rate. The less equity you have, the higher your rate. “The higher rate applies for as long as you have the loan, so this option makes sense only if you don’t plan to own your home for the long term,” says Esswein. “You’re going to have to pay the higher rate for as long as you have that loan, it’s not going to fall away when you reach 20 percent equity.”

Before you decide to take lender-paid mortgage insurance, Esswein says to calculate your monthly payments and the total interest you’ll pay over the life of the loan, based how long you plan to keep loan.

So if you have to take on PMI, is it worth it to refinance? After all, you’re trying to lower your payments, not add extra fees!

Esswein says that as long as you’re saving money, it’s worth it. “PMI is a tool you can use if you need it, and if you’re still reducing payments and saving on interest, then it makes sense,” says Esswein.

And even if you have enough cash to bring your loan-to-value to 80 percent, you might think twice about spending it. “Before you bring cash to the table, decide what else you might want to spend that cash on,” says Esswein. “Don’t drain your emergency fund to avoid PMI.”

Finally, if your appraisal is so low that you owe more on the house than you could sell it for, you have options, too. Esswein recommends makinghomeaffordable.gov, which highlights home loan programs and refinance options for people who are underwater on their homes.

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Sprucing up/upgrading your interiors can positively affect appraisals. If you have a rental property that you plan to sell in the future, you have to make sure that it is properly managed and maintained. Irresponsible tenants can wreck your valued investment.

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Jess

Some Appraisers are just biassed. We are Veterans. We HAVE to use VA. The VA sends the appraiser out. And some of them are just plains rude and don’t care. In fact, I believe they are encouraged to do what’s BEST for the VA. not for the Veterans!

our Appraiser in Colorado Springs is Jeff Cook! He appraised our home $50,000.00 Less than what it should be or IS worth! All of the houses made by our Manufacturer are worth that and more. Our house is well kept and only 10 months old. In fact we have made 20 grand in improvements, this was not taken into consideration! Our neighbors home is selling for 385 grand. And its the same size. VA is still a difficult agency!

Be careful…..They are not out for you! They are only out for the betterment of the person or entity paying them!

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roger

Got an appraisal from them, last year came in at 97000.he gave me 80000.How can this be? He had no comparable.He is not from this area.Incorrect on most of his reportings.Probably won’t get the loan I need,thanks to him.I even suggested what I was needing.

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Tim

Gosh, this talk of homeowners being underwater on their loans is frightening. Here in NZ we have all the hallmarks of a bubble with prices that have been in a sustained upward swing for atleast 2 years more than anyone predicted, artificially low rates, and banks routinely lending 90 and even 95%.

I have a feeling we’re going to see some of the same rough landings down under too. The only thing that is keeping momentum up right now is positive immigration and short supply of good housing stock in our main centres.

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Health Protein

With the house prices these days and the current economy it is very hard to not imagine that there are going to be consistent low appraisals, which is very unfortunately for anyone tring to sell their house.

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KC

I am in the process of refinancing our previously primary residence (now rental/investment property) in TX from an original 80%/10% two mortgage scenario to a 75% single mortgage @ 3.75% / 30 yr. The appraisal has come around 4.5% lower than I had expected. This has thrown of course a monkey wrench into my plans. I was going to pay off my 2nd loan myself anyway, but now don’t want to clean out my savings to make up the 5% difference and close this new loan.

Am I making the right decision by walking away from this refinance? Do I have any other options for investment property refinance over 75% LTV? Thanks in advance for any suggestions.

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Cara

Since we can’t sell we would like to refi our mortgage, but I don’t think this will be possible anytime soon. Rate is currently 6.89% and I’m fairly certain an appraisal would come in far less than what we need despite 40K in improvements (mostly structural/mechanical). It may come in near or a bit below the balance on the mortgage, but there’s no way anyone would do a 100+% LTV refi. It doesn’t help that there are very few comps in the area.

Our mortgage is not held by Fannie or Freddie, nor have we ever fallen behind on our payments (not even when DH was laid off for a year), so we find it incredibly frustrating there’s no hope (aside from credit-damaging walking away, a credit-damaging short sale, or some miraculous gigantic increase in values in the next year) for homeowners like us.

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Dona Collins

While I can see the value in getting a higher appraisal, there is a problem. Many banks will force a homeowner to increase the value of his home on the homeowners insurance policy to the amount of the appraisal and the numbers don’t (and never will) match up.

When your bank appraises your home, they appraise the total value of your property – land and structures. When your insurance company assigns a replacement cost, the number applies to your structures alone.

Banks will often force homeowners to increase the limit on the homeowners policy to match the loan amount. This results in higher premiums paid with a risk that if the home is destroyed the entire loan won’t be covered. The insurance company will, at the end of the day, focus more on the actual replacement cost value of the home than the loan amount.

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Mario

Did not know PMI was that low. Is it tax-deductible as well?

For those of us who took loans at any time in the 00s, the difference in loan rates then and now could more than make up for the PMI

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Eric

Sam brings up an interesting point that should be made for anyone refinancing or buying. At current mortgage rates the difference in monthly payments between a 30 and a 15 year mortgage is only about $100 per $100k of the loan. However, with a 15 year you get a straight line amortization that has you paying as lot more principal earlier/faster. We refinanced recently with a 2.625 rate and I recently saw that some banks are now offering 2.5% 15 year loans.

If you’re buying a new house there’s no excuse not to get a 15-year loan. If you can’t afford the monthly payment difference, I think you should reconsider buying that house in the first place and look for a more affordable one instead.

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Dave

I am in the building business in South Florida. We built 10 townhouses 3 years ago. We have 2 sold and 2 rented. We cut our asking price in half. At that price the bank appraises the townhouse at $40,000 less than our asking price. Our only option is owner finance. We were going to continue to have them for sale but with the last election we have lost all hope. I see the downturn lasting till the end of the decade. I’m 55 and this is the third real estate down turn I have seen here. They lasted two years tops. Not this one.

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Bridget

Most underwriters will not take a second appraisal. Some might have to get a new lender altogether. There is still a chance your appraisal will not appraise for what you are selling your home for.

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Celina

It may also be worth noting that while taking an FHA loan with PMI allows you to take out a mortgate w/o putting 20% or so down, it also locks you into paying PMI for a minimum of 5 years.

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Mrs PoP @ Planting Our Pennies

It’s probably also worthwhile checking into your smaller local banks or credit unions that might be more inclined to keep your loan on the books instead of selling it off. They might be more willing to work with you.

If that’s not an option, the biggest difference would be to request a local appraiser. Like Sam, we’re in S. Fl, but the real estate markets around here have become hyper-localized in terms of how quickly they are recovering from the crash, so it would pay to have someone understand whether a sale half a mile away from your house is actually indicative of anything to your home.

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Sam

Good advice here. We refinanced this summer from a 25 year loan to a 15 year term and got a 2.75% rate (saving us $180,000 over the life of the loan).

We were in a tough appraisal spot in that we have a unique home in a historic neighborhood. It was hard to get good comps when we bought the property in a great market so obviously even harder in a iffy market (So. Florida). So we cleaned up the property (see below post), I was present for the appraisal and pointed out all the upgrades and made sure the data was accurate. I also did comp research for the appraiser and made sure he was aware of a recent sale of a property that was a good comp for our home.

We just went through this process. Because our house went down in value (we were still apraised higher than the comps in the neighborhood) we did have to pay PMI. We still saved about $350/month on the pymt so it was worth it.

An interesting side note, when the appraiser came he commented that the fact that I had color on the wall vs. a builder white or beige was in my favor. He said that a lot of color meant we were planning on staying and not selling or renting and that the bank looked at that favorably.

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Peggy

Almost all of the rentals and for-sale homes here have been beiged over into a neutral color scheme, and some people (like me) are thoroughly, thoroughly sick of it. Good colors really make your home stand out. I’ve gone so far as to blame much of this recession on a stagnation in color schemes and interior decoration.

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Matt

Another option is to ask the appraisal company to reevaluate the comparables used in their analysis.

When I refinanced a couple of years ago the initial appraisal came back a couple of grand short of what would have made the load 80% of value. When asked, they appraisal company added another comparable to the report that shifted the appraisal value up slightly.

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Stacy

Odd. We had our house appraised about 5 years ago to remove the PMI that we were paying. IIRC the appraiser didn’t even come in the house or talk to anyone here. He walked around, measured some, and we got an appraisal in the mail. That time our house appraised for double what we paid for it (peak of the boom) and more than enough to remove our PMI. Now it would appraise for maybe 2/3 of what we owe but I looked into a Making Home Affordable option and never heard back after filling out the initial paperwork.

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Crystal

Our appraisal didn’t hurt our refinancing options, but the closing costs definitely gave us pause. Here in this part of Texas at least, you will spend $2000-$4000 on closing costs on a $150,000 house. We didn’t have enough principal left for that to make sense. We just got lucky in 2011 when Chase offered us a no cost refi…

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Lisa Aberle

We ran into this when we refinanced, because our appraisal was sooooo low. The solution was unconventional. Since our mortgage is at a small town bank, the bank president (who knows us) said he would refinance it without PMI or any of the other other things you mentioned. He couldn’t sell our mortgage on the secondary market since we no longer had 20% equity and he “might get in trouble with the auditors,” but he took the risk.
We are happy. He is happy. I don’t know if the auditors are happy.

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Dillon

Here’s a tip, tell the appraiser what you need it to be appraised at. When I refinanced my home 2 years ago, I knew that if it didn’t appraise at X, I couldn’t do the refi without putting more money into the house. I called up the appraiser before they came out because I didn’t want to pay for them to appraise it if there was no way I was going to get X. I explained this to the appraiser and they told me that they couldn’t know how much it would appraise for without looking at it. I thought that was silly because aren’t comparables a big piece of the value. I took a chance and had the guy come out even though I thought it was very likely my house wouldn’t appraise for enough and guess what?? My house appraised for exactly the number that I had told the appraiser I needed it to appraise for. Not a dollar different.

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Carla

You forgot options four and five: split financing and HARP. Take an 80% first loan and a 10% second loan, then pay off the second as quickly as possible. You’ll usually end up paying less than you were originally, and less than you would with PMI or FHA. With rates this low, coming up with cash if you don’t have to is kind of silly. And HARP is designed to help people get market rates with underwater homes. This article is a little too simplistic….

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Mel

I suffered through this nightmare and had to wait 5 months to start over and do a streamline refi through FHA. I was at 5.5% and was trying to refinance. Eveything went smoothly until the appraisal. I let the bank choose him. I should have asked for a different one as soon as I saw that he was from the same rich suburb I had originated from. I live in a very urban area in the midst of spectacular revival. The area can vary significantly in a few block radius. The “comps” were all run down foreclosures or on the brink of foreclosure with no updates on busy streets (vs my residential area off the main drag.) I had been through two of these comps, unlike the appraiser. He chose not to use the closest updated house because it had “higher grade updates.” On what planet are granite counters and wood floors lower grade than stock laminate counters and laminate floors? I should have asked the realty company around the corner who they use. Hindsight is 20/20 I guess.

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Oliver @Christian Money Blog

Unfortunately the appraisal is the deciding factor in many cases. I think they just try to throw out a conservative number that doesn’t bear any risk for the appraisal company after the housing fiasco in 2008. Hopefully you can still refi in the future!

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Sam

The new rules require a blind selection of appraisers and yes that can be a problem if the appraiser is not familiar with your neighborhood.

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Kristen

Thank you. I immediately thought of this as a major oversight in the article when I read it, but I wasn’t able to comment earlier…
Banks don’t choose their appraiser anymore. We just bought a different home… there is a pool of appraisers. The bank puts in the request and they have NO IDEA which company will do the appraisal.

Also for the admins – every time I add a comment using Chrome I get an error message. I can only add comments by specifically using Internet Explorer, which usually makes me give up.

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bella

I just refinanced and ended up going through two banks with two different appraisers. First bank appraisal came in at 92k. Second bank appraisal was 164k. If you honestly feel you had a bad appraisal, go with a different bank, worked well for me. This was within a one month timeframe.

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